Prospects strengthen for GATA African Gold Conference next week

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Where there's gold, there's fire:
Just above multi-year low,
is it ready for bounce?

By Thom Calandra
FT MarketWatch.com
May 2, 2001

LONDON (FTMW) -- Some professional investors are
questioning the traditional belief that gold -- and gold
mining shares -- can rise only as the U.S. dollar
declines or as inflation accelerates.

John Hathaway, who manages the $20 million Tocqueville
Gold Fund from New York City, says "a protracted bear
market in stocks and financial assets" will sway investors
into the metal.

Larry Edelson, managing editor of The Safe Money
Report in Florida and a former commodities trader,
sees a weakening relationship between dollar strength
and gold weakness.

"I believe a split is coming in the normal relationship
between the two," says Edelson. "In other words, a
strong dollar does not necessarily mean lower gold
prices. If the dollar continues to remain strong or
get even stronger, it's a darn good sign there are
big problems elsewhere in the world, problems that
could easily light a fire under gold."

On Wall Street, analysts such as those at Salomon
Smith Barney point to steadily rising demand for the
metal in jewelry. Scientific developments also may
boost industrial demand for the metal. Gold is a highly
conductive and soft metal that may find uses in
catalytic converters and in wiring for electronic
writing pads and other embedded computing devices.

Gold use in electronics rose 15 percent to 106 tons
last year, Gold Fields Mineral Services said in an
April report.

The deficit between physical supplies and growing
consumer demand for cheap bullion could be as high
as 25 percent, some mining analysts estimate. Gold
sells for about $265 an ounce, not far from a
multi-year low of $252 set in August 1999. The metal's
price has ranged from $252.80 to $326.25 in the past
year.

Still, it is the lack of investment demand for gold
that is depressing prices of the metal. Repeated central
bank sales of gold across Europe coupled with tame
inflation have battered prices.

Most economists are unwilling to break the link between
the strong dollar and gold. Gold, while it sometimes
changes hands in euros, yen, South African rand, and
the Australian dollar, is largely denominated in dollars.
The dollar, and dollar-denominated securities, traditionally
have provided investors with a feeling of comfort and with
valuable liquidity during times of crisis.

In the same way, many modern investors have placed
their belief in the Federal Reserve, which modulates
interest rates and is responsible for managing the U.S.
economy. In the 30 years since U.S. President Richard
Nixon effectively ended the use of gold as a money
standard, the price of gold has only occasionally
risen in reaction to Federal Reserve actions, most
notably in 1980 and 1981. Gold prices back then rose
above $800 an ounce as U.S. interest rates soared.

Some investors now say the no-holds-barred belief in
both the dollar and the Federal Reserve is at a testing
point.

"Since the Latin American crises of the early 1980s,
the Federal Reserve's response to market difficulties
has been to bail out anyone who has made a bad
investment," Hathaway tells investors in a letter to his
fund's investors.

"Now the Fed's bailout strategy has gone too far,"
says Hathaway, whose gold mutual fund is up 5 percent
since launch in June 1998. "No longer are the potential
losers from bad investments confined to lenders to foreign
countries, bankrupt hedge funds, or bad banks. It is
now the American public, which has been suckered into
pouring its life savings into a dangerously overvalued
stock market."

Jude T. Wanniski, president of political consultancy
Polyconomics Inc., says central banks will move back
to using gold as an economic indicator. "It was Karl
Marx who actually impressed that on me when he
proclaimed that 'Gold is the commodity money par
excellence.' It is as good as it gets," says Wanniski, who
airs his beliefs at www.polyconomics.com. "The world is
not going to give it up, no matter what Milton Friedman,
the monetarist, or Yale's James Tobin, the Keynesian,
say about it."

Edelson in Florida notes that gold mining shares as
measured by the Philadelphia Gold and Silver Index
and the CBOE Gold Index are a fraction below their
highest point since mid-May of last year.

Most gold miners, such as Newmont Mining, have seen
their quarterly profits turn into losses as gold prices stay
stuck in a $260-$300-an-ounce range. Yet gold mining
shares, curiously, are rising.

Newmont's chief executive, Wayne Murdy, told shareholders
this week that his company, the largest North American
gold producer, has no intention of increasing the amount
of gold it forward-sells, or hedges via the use of derivatives.
Such hedging, while providing extra income for miners, is
seen as a powerful drag on gold prices.

Edelson says the divergence between a flat gold price and
rising gold mining shares is an indication that the metal
may break away from its traditional links with the dollar and
inflation.

"The ideal situation right now would be for mining shares
to hold their own, and gold make a stab at a new low.
That would set up a divergence that would signal a major
bottom, in my view," Edelson says.

"As for inflation -- while I do believe it's coming
on a worldwide basis as central banks try to reflate out
of the trillions that have been lost in stocks -- it too
is not needed to get gold going," he says.

One group intends to air its beliefs about governments'
role in gold markets at a South Africa conference next
week. The Gold Anti-Trust Action Committee, based in
Texas, says it "will reveal proof of the suppression of
the gold price by the U.S. and German governments and
bullion banks." The conference is scheduled for May
10 in Durban, South Africa.

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Thom Calandra is editor-in-chief of CBS MarketWatch and
FTMarketWatch.com.